My New Blog

Inspection contingencies a must if utilities are turned off

July 28, 2008

By Benny Kass
Inman News

DEAR BENNY: My mother was under contract to buy a foreclosed house from the bank. Before closing, she had the house inspected. During the time the house was being inspected, the heat and water system was shut off (I guess the former owners weren't paying their water and gas bill). The inspector documented in his report that the heater and water were not inspected and further stated that when it is turned on we should consult a contractor to check that everything is in order. My mother signed off and purchased the house. When the water was turned back on, she discovered that one pipe was leaking and the heater was not working.

These are health hazards, and my mother must fix everything. Who is responsible: the bank for not turning on the heat and water system so that everything could be inspected properly or my mother for insisting that the utilities be in working order before the inspection? We did not know our rights because we were dealing with a foreclosure property. --O.K.

DEAR O.K.: I am afraid that your mother will have to fix these problems at her expense. And the advice that I will provide below applies whether you are buying a foreclosed house, an older property or even a brand-new one.

I am a strong believer that anyone who buys a house must have an independent housing inspector thoroughly evaluate the house and provide you with a written report. Your purchase and sales contract must contain an "inspection contingency" -- which means that you have XX number of days in which to have the property inspected. If you advise the seller that there are problems with the house within the time limit spelled out in the contract, the contract will either be null and void (and your earnest money deposit returned to you) or the seller will agree to make the necessary corrections (or give you a cash credit at settlement).

Actually, I prefer the cash credit. All too often, home buyers plan to make modifications or renovations to their new home, and the repairs that the seller may make will have to be undone. And besides, all too often, a seller forced to pay for repairs will hire an unlicensed contractor who may not do a good repair job.

Before the inspection takes place, you must insist that all utilities be in working order, so they can be properly inspected. Your mother's mistake was to go to settlement without carefully inspecting the entire house, and once she is the title owner, she assumes the obligations to pay for these repairs.

Many states have "seller disclosure" requirements. If your mother had not bought a foreclosure home, she may have an argument that the seller indicated the plumbing and heating system were in working order, and since they clearly were not, the seller has misrepresented the condition of the property. However, to my knowledge, banks that sell foreclosed homes are normally not legally required to provide such a disclosure.

Your mother made yet another mistake: She should have inspected the property the morning that settlement (escrow) took place. I advise all of my home-buying clients to include the right to a "pre-settlement inspection" in the sales contract. This final inspection must take place the morning of settlement -- not the day before -- and never at night when you cannot see everything in the house.

 Side note from Samuel:

Also keep in mind in regards to purchasing foreclosures:  Should the lender require an inspection and it is found that the home has issues or should the appraisal note issues with the property the lender may require repairs to be done before closing.  You must keep this mind especailly when dealing with bank foreclosures, the bank will not make the repairs as a result the buyer may have to make repairs on the property before closing.  To avoid this the buyer can go for a construction loan or rehab loan.  This will allow the buyer to have the repair cost rolled into the loan.  Feel free to give me a call for more details as there are additional pros and cons for this type scenario.